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Post-Election Trades Reverse Course

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November 15, 2016

By Riva Gold and Akane Otani

The Dow Jones Industrial Average slipped and the selloff in government bonds eased Tuesday, as some of the biggest post-election moves changed direction.

In recent sessions, investors have sold bond-like stocks such as utilities and snapped up stocks of banks and infrastructure companies, expecting that President-elect Donald Trump will increase fiscal spending, lower corporate taxes and ultimately boost growth and inflation.

On Tuesday, the "reflation trade" showed signs of slowing. Financial stocks, which have rallied since ElectionDay as investors bet on looser regulations and higher interest rates, lost 1% in the S&P 500.

Investors also shed industrials, which had been lifted by expectations of a ramp-up in infrastructure spending.

The Dow Jones Industrial Average fell 22 points, or 0.1%, to 18847, on track for its first daily decline since Nov. 4.

"There's a feeling in the markets that we may have gone a bit too far too fast and abandoned all these growth companies and bonds way too quickly," said Tim Courtney, chief investment officer of Exencial Wealth Advisors. "Today the markets are taking a bit of a breather."

The S&P 500 rose 0.3%, and the Nasdaq Composite, lifted by a rebound in tech stocks, added 0.8%.

Long-term government bonds showed signs of slowing a post-election selloff Tuesday. The yield on the 10-year U.S.Treasury note was recently at 2.216%, compared with 2.224% on Monday, after its largest five-day gain since 2009. Yields move inversely to prices.

Short-term debt sold off after a robust retail sales report showed the U.S. economy on solid footing. The yield on the two-year U.S. Treasury note rose above 1%, a fresh 10-month high, up from 0.988% Monday. A stronger economy bolsters the case for the Federal Reserve to raise rates, which makes government bonds less appealing to hold.

"Attention at the moment is on the bond market, which is driving everything," said Stephen Gallo, strategist at BMO Capital Markets, who said he expects the direction of yields and the dollar to remain higher in the coming weeks.

Much of this will depend on the Fed's stance in December. Richmond Fed President Jeffrey Lacker said Monday that possible fiscal stimulus under the incoming administration could cause the U.S. central bank to raise interest rates faster than anticipated.

"As a general matter, doing monetary policy with a more stimulative fiscal outlook usually warrants higher policy rates," he said.

The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, inched up less than 0.1%, on course for a seventh session of gains.

In commodity markets, oil prices began to reverse recent losses Tuesday as traders positioned for a meeting of the Organization of the Petroleum Exporting Countries at the end of the month, where members are set to discuss a proposed production cut. U.S. crude oil rose 4.7% to $45.37 a barrel, on track to snap a three-session losing streak.

Elsewhere, the Stoxx Europe 600 rose 0.3% following a subdued session in Asia. A fall in mining companies kept European gains in check, whileEurope's real estate and utilities sectors, which are considered bond proxies, were among the best performers.

The Shanghai Composite Index and Japan's Nikkei Stock Average ended with small losses after three sessions of gains, while Hong Kong's Hang Seng rebounded 0.5%.

The Mexican peso, which has fallen more than 10% from a week ago, rose 1.8% against the dollar. The Chinese yuan fell to its lowest level against the dollar in nearly eight years, continuing a recent decline.

Write to Riva Gold at riva.gold@wsj.com and Akane Otani at akane.otani@wsj.com